An Engaged Conversation on Divestment

A movement to divest from fossil fuel companies stirs the emotions of many. The urgency behind such requests reflects increasing concern about global warming. While there is no doubt about the underlying devastating risks of climate change driving this advocacy, the question of divestment versus engagement as an effective strategy warrants exploration.

At the Ceres Conference this May 2013, a panel consisting of David Blood, Cofounder and Senior Manager of Generation Investment Management LLP, Bill Mckibben, Environmental Activist/Author and President/Cofounder of 350.org, and I, offered insights on investment strategies to address climate change. During our discussion, it was pointed out that substantial research firmly demonstrates rising temperatures in our global climate threaten to permanently alter our environment for the worse.

Despite the evidence, businesses and policy-making bodies are either moving too slowly, ineffectively or not at all to reduce fossil fuel consumption. As a result, an emboldened younger generation has launched a grassroots effort calling for dramatic and immediate action to divest from fossil fuel companies. Their belief is that divestment by investors, institutional and individual alike, can create financial market pressure to bring about carbon-use change. Much like a tough love approach, the idea is to compel movement towards responsible alternative energy sources.

The discussion became intrinsically more complex when it was pointed out that the core business practices of the vast majority of companies either directly produce or benefit from fossil fuels. Clearly, American dependency on fossil fuels dominates every facet of businesses both willing and unwilling to engage in alternative energy solutions. Without an alternative, the motivation to surrender an extremely lucrative and foundational endeavor complicates any incentive to change. Divestment in this situation is akin to asking a coffee shop to stop serving coffee.

Divestment’s Track Record

Divestment can occur either because of an investment strategy or for social, moral or political purposes. The divestment from fossil fuels as proposed by divestment activists operates similarly to a boycott. It’s a voluntary abstention from investing, profiting, and dealing with an organization or business as an expression of protest. In this case, divestment bears the risk of adversely affecting an investment portfolio and severs any chance to advance positive change through shareholder advocacy.

The comparison used to promote divestment as a social, moral and political strategy takes root in the South African Anti-Apartheid movement in the 1980s. At the time, economic pressure was viewed as the vehicle to influence change. Divestment, along with legislation, boycotts and national consensus, were employed and are collectively credited by many with the success of this campaign.

CalSTRS largely eliminated investments in the tobacco industry in 2000 when it changed its investment benchmarks, and in 2009, completely divested from tobacco based on our divestment policy and the 21 investment risk factors identified in our investment policy for mitigating environmental, social and geopolitical risks. The 21st risk factor, the risk to an investment’s long-term profitability from business exposure to an industry that makes a product that is highly detrimental to human health so that it draws significant product liability lawsuits, government regulation, United Nations sanctions and focus, and avoidance by other institutional investors, was the basis of our separation from an industry that profited at the expense of clear human health risks.

CalSTRS is a patient, long-term investor, and the ultimate economic impact of divestment from tobacco cannot yet be determined. Similarly difficult to assess is the social impact of this action. What we do know is that CalSTRS no longer exerts institutional strength in this market sector and cannot attempt to leverage that financial strength to achieve reform.

Engagement Proves Effective

Based on our experience, an effective strategy to mitigate risk, such as climate change, is through engagement. Aligned interests working in concert can influence capital market change. Engagement operates under the principle that inappropriate actions call for correction.

Last year CalSTRS targeted 100 companies in the Russell 1000 index portfolio which lacked sufficient disclosure of energy and water use management. More than 30 companies responded with evidence of their desire to either release efficiency efforts or consider alternative approaches. On the heels of this progress, we’ve expanded our engagement to fossil fuel valuation.

CalSTRS strongly believes the issues presented in Carbon Tracker’s Unburnable Carbon 2013: Wasted capital and stranded assets report call for action. Of the top 200 global fossil fuel companies listed on the Carbon Tracker website, CalSTRS has engaged 44 U.S. companies held in our portfolio requesting disclosure. Engagement through educated dialogue will be far more productive in accomplishing our goal that these companies publicly price the risk posed by unburnable fossil fuels.

Comments

I am quite concerned about fracking for several reasons. Principally, an indispensible natural resource, water, is being wasted and/or contaminated. I submit that we need to divest ourselves of companies that waste our natural resources, especially water, and invest in the preservation of natural resources, especially water. Smart investments in solar energy, wind and even in companies that develop technology to somehow benefit from ocean tides or currents, as well as other renewable resources, it seems to me, are pragmatic options as we phase out of or minimize fossil fuels (especially those that contaminate water).

Water in the final analysis is far more necessary to the survival of all living things than is oil. I believe that Carol de Sa Campos is exactly correct in calling for ways to produce energy that do not waste our most precious natural resource, water. We must phase out the burning of fossil fuels as our primary energy source and use those that do not depend on wasting niether water nor oil. My high school chemistry teacher back in the 1950s said someday our descendants would curse us for wasting oil when they discover all the wonderful things that could be made from it. I did not expect that time to come during my lifetime, but it has.

A movement to divest from fossil fuel companies stirs the emotions of many. The urgency behind such requests reflects increasing concern about global warming. While there is no doubt about the underlying devastating risks of climate change driving this advocacy, the question of divestment versus engagement as an effective strategy warrants exploration.
It is amusing to read such erroneous information about so-called global warming and the supposed devastating risks of climate change in a STRS related document. Obviously the author is in harmony with the goreites who he admires and invests with while he is actually charged with protecting our investment based upon sound financial practice rather than basing investments upon poor and discredited science practices.
As I drive around I note thousands and thousands of fossil fuel users and even though conservation is good and alternative energies are good they will not REPLACE fossil fuels for cost and efficiency. The silly concept that CO2 is bad demonstrates the ignorance of the goreite like minds as all the plants on earth rely upon it to produce the food we rely on.
So STRS focus on sound investment practice and not pseudo science.

Your Blog Entry regarding divestment is rather "alarming" to me. It certainly stirred my emotions. How can you support the "urgency" of divestment from fossil fuel companies when worldwide CO2 has been increasing but the temperatures have been decreasing? Since there is no correlation between the two there cannot be any major impact of fossil fuels on our environment. It sounds to me like you have already made up your mind and that you support the reduction of fossil fuel use at the risk of investing only in alternative "green energy" solutions. That does not sound like a "smart" investment strategy for the use of our/my investment funds. There needs to be a forum, open to all educators about this issue, not a well concealed blog entry posted far away in the corners of the CalSTRS website.

At some point it will become obvious that it's more than just "moral" to divest, it is survival. The fossil fuel industry is in its last throes. If we cannot reinvest before the whole system collapses, we will be in big trouble.

We believe climate change poses significant risk issues that should be addressed now; however, it also opens up new investment opportunities. This is why we recently announced plans to increase clean energy and technology investments over the next five years.
http://www.calstrs.com/news-re...

First of all, I love this new feature of CalSTRS---very transparent and supportive of the millions it serves. !Bravo!
Second, as someone who retired 8 years ago, but worked for LAUSD for 36+ years, I remember in my early career that our retirement funds were invested in interests in South Africa. And, I'm not sure if that was before or after we joined the CalSTRS system. All I remember is that there was an eventual outcry to divest of those holdings and we sought other means to sustain the retirement funds. Can you clarify this for me? Was is LAUSD or CalSTRS that once invested in interests in South Africa---before apartheid ended?
Thanks.

You're right: asking fossil fuel companies to stop selling greenhouse gas emitters is like asking the coffee shop to stop selling coffee. It can't work. Nor has it: "constructive" engagement has been going on at least since NASA testified about the phenomenon to Congress in 1988. In the ensuing 27 years greenhouse emissions have risen 61%.**
Diversified portfolios generally contain about 10-12% fossil fuel holdings. Substantial studies by Aperio, MSCI, and Impax Asset Management show that reinvesting that 10-12% can be done with essentially no impact on portfolio return.**
Loss of return is in the minimal-mythical range. In contrast, losses due to climate change are catastrophic. Risky Business calculates the annual costs to US energy consumers and east/Gulf coast properties alone at nearly $20 billion/yr over the next 5-25 yrs. That doesn't touch droughts, firefighting, losses to agriculture, losses to fisheries, or other national or worldwide infrastructure, employment, and productivity losses. And it doesn't touch the issue of human suffering due to the environmental/economic instability and resulting societal upheaval.**
Investing in clean fuels instead of fossil fuels may be new and unsettling, but the best understandings of our situation show that anything less is likely to prove both inhumane and financially irresponsible.

Your Blog Entry regarding divestment is rather "alarming" to me. It certainly stirred my emotions. How can you support the "urgency" of divestment from fossil fuel companies when worldwide CO2 has been increasing but the temperatures have been decreasing? Since there is no correlation between the two there cannot be any major impact of fossil fuels on our environment. It sounds to me like you have already made up your mind and that you support the reduction of fossil fuel use at the risk of investing only in alternative "green energy" solutions. That does not sound like a "smart" investment strategy for the use of our/my investment funds. There needs to be a forum, open to all educators about this issue, not a well concealed blog entry posted far away in the corners of the CalSTRS website.

Your Blog Entry regarding divestment is rather "alarming" to me. It certainly stirred my emotions. How can you support the "urgency" of divestment from fossil fuel companies when worldwide CO2 has been increasing but the temperatures have been decreasing? Since there is no correlation between the two there cannot be any major impact of fossil fuels on our environment. It sounds to me like you have already made up your mind and that you support the reduction of fossil fuel use at the risk of investing only in alternative "green energy" solutions. That does not sound like a "smart" investment strategy for the use of our/my investment funds. There needs to be a forum, open to all educators about this issue, not a well concealed blog entry posted far away in the corners of the CalSTRS website.

Thank you for your comment. You are correct in that transparency in our discussions leads to a more informed dialogue. Part of that transparency involves opening our blogs up to comment, holding open discussions during our board meetings and preparing many articles on this subject, just to name a few items. Our hope in creating the sustainability section of our website is to give prominence to these important issues.

I am concerned that CALSTRS pension fund is taking so long to divest from fossil fuels. For goodness sakes, we work with children and have children and grandchildren whose futures are at stake. While CALSTRS waits and considers, our earth is experiencing climate change.
Even if you're only looking at it purely from an investment standpoint, CALPers and CALSTRS lost over 5 billion dollars last year on fossil fuel investments.
Here's the link:
http://gofossilfree.org/usa/pr...

I believe you've got your analogy a bit mixed up. Divestment is like STOPPING financing a coffee shop that is serving poisoned coffee. Engagement is like ASKING them to stop serving their dangerous brew. Of course engagement won't work. The fossil fuel industry knew their products were dangerous before you and I did. They did not choose to make alternative investments at the time. Instead they chose to spread intentional misinformation and donate millions to politicians who vote against environmental protections.
Engaging with them will only give them more time and money to continue this duplicitous and dangerous path.
Divesting means that we are not allowing them to pollute anymore - not on our dime.
It is not our business to keep the fossil fuel industry in business or to find an alternative way for them to garner profits. It is our business to invest in companies that will be the energy of the future, companies that don't have a history of lying and destroying the planet.

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